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Stocks Higher as Q4 Earnings Season Begins

U.S. equities ended the day and week higher, as the markets reacted to a host of results from the banking sector to kick off Q4 earnings season. Bank of America, Wells Fargo, and Dow member JPMorgan Chase all bested estimates, but each posted significant increases in provisions for loan losses, while Citigroup fell short of forecasts. Meanwhile, Dow component UnitedHealth Group beat forecasts and reaffirmed its guidance. News on the economic front was mixed, as a read on import prices surprisingly increased, detracting some from yesterday's tamer read on consumer prices, while consumer sentiment rose far more than what was projected. Treasury yields were higher, and the U.S. dollar dipped, while crude oil and gold prices traded to the upside. Asian and European stocks finished mostly higher, as investors digested inflation reports from the U.S. and abroad.

The Dow Jones Industrial Average rose 113 points (0.3%) to 34,303, the S&P 500 Index increased 16 points (0.4%) to 3,999, and the Nasdaq Composite advanced 78 points (0.7%) to 11,079. In moderate volume, 3.9 billion shares of NYSE-listed stocks were traded, and 5.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.47 to $79.39 per barrel. Elsewhere, the gold spot price went up $25.50 to $1,924.30 per ounce, and the Dollar Index dipped 0.1% to 102.15. Markets ended higher for the week, as the DJIA gained 2.0%, the S&P 500 climbed 2.7%, and the Nasdaq Composite soared 4.8%. 500 Index is dipping 0.1%. WTI crude oil is increasing $1.11 to $79.50 per barrel, and Brent crude oil is advancing $0.94 at $84.97 per barrel. The gold spot price is trading $16.70 higher to $1,915.50 per ounce, and the Dollar Index is flat at 102.27.

Dow member JPMorgan Chase & Co. (JPM $143) reported Q4 adjusted earnings-per-share (EPS) of $3.57, ahead of the FactSet estimate for $3.08, as revenues jumped 18.1% year-over-year (y/y) to $34.55 billion, mostly in line with analysts' forecasts. Consumer and commercial banking revenues gained solid ground, posting respective y/y increases of 29.1% and 30.3%, more than offsetting a 9% y/y decline in investment banking. JPM also declared a $2.3 billion provision for credit losses for expected defaults, a 49% increase from last quarter.

Chairman and CEO Jamie Dimon said while the U.S. economy remains strong, "…we still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher, and the unprecedented quantitative tightening." JPM traded higher.

Bank of America Corp. (BAC $35) posted adjusted Q4 EPS of $0.85, eclipsing the $0.77 FactSet estimate, with revenues rising 11.2% y/y to $24.53 billion, slightly north of the Street's forecast of $24.17 billion. Consumer banking revenues jumped 21% y/y, with net income hitting a record $3.6 billion, citing an increase in net interest income to $14.7 billion. BAC said net interest income rose 29% y/y to $14.7 billion amid the rise in interest rates, slightly below the Street's expectations, but helping to offset a 50% decline in investment banking fees of $1.1 billion. The bank also implemented $1.1 billion for credit losses, up $1.6 billion from a year ago, despite net charge-offs remaining below pre-pandemic levels. Shares gained ground.

Citigroup Inc. (C $50) reported Q4 adjusted EPS of $1.10, falling short of the Street's $1.14 estimate, and a 21% tumble from the same quarter a year ago. Revenues rose 5.8% y/y to $18.01 billion, a shade higher than the $17.90 billion that the Street was forecasting. Net interest income for the period was $13.7 billion, above expectations and helping to offset a sharp decline in investment banking revenues, while proceeds from its services segment were up 32%. Shares of C increased.

Wells Fargo & Company (WFC $44) posted an adjusted profit of $0.67 per share, slightly ahead of the $0.60 FactSet estimate, as revenues declined 5.7% y/y to $19.66 billion, short of analysts' estimates of $19.98 billion. The company said its results reflect a $2.8 billion, or $0.70 per share, loss as a result of the impact of legal and regulatory costs. WFC said it set aside $957 million during the quarter for credit losses after reducing such provisions last quarter, with $397 million of that increase for the allowance reflecting a shortfall in loan growth and an unfavorable economic environment. WFC's results come just days after it announced that it would reduce the size of its U.S. mortgage lending business. Shares advanced.

Dow component UnitedHealth Group Incorporated (UNH $490) reported Q4 EPS of $5.34 ex-items, above the $5.17 FactSet estimate, on a 12.3% y/y increase in revenues to $82.79 billion, slightly higher than the $82.48 billion estimate. The healthcare giant said that the full-year revenues rose 13% y/y with double-digit growth in both its Optum and UnitedHealthcare segments. As such, UNH reaffirmed its full-year 2023 EPS and revenue guidance. UNH traded lower.

As Q4 earnings season, gets rolling, investors continued to grapple with the ultimate impact of aggressive Fed actions to try to combat rising prices. Last week’s December job report added to the uncertainty regarding the Fed’s monetary policy decisions. Schwab’s Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Hurts So Good: Jobs Picture Stays Mixed, how there was something for everyone—even those supportive of an economic soft landing—in December's jobs report, but recessionary signals have not subsided. You can follow Liz Ann on Twitter: @LizAnnSonders.

The Central Bank downshifted in December from a string of four-straight 75-basis point (bp) rate hikes to a 50-bp increase. However, the deceleration remained unusually aggressive, and the Fed signaled that restrictive policy will likely have to remain in place for longer and at a potentially higher "terminal rate" than expected.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

Import prices surprisingly rise, consumer sentiment jumps

The Import Price Index increased by 0.4% month-over-month (m/m) for December, versus the Bloomberg consensus estimate of a 0.9% drop, and compared to last month's negatively adjusted 0.7% decrease. Versus last year, prices were up by 3.5%, higher than November's unrevised 2.7% rise, and compared to the expected 2.2% increase.

The preliminary University of Michigan Consumer Sentiment Index (chart) for January showed that sentiment increased more than expected, jumping to 64.6 from December's final reading of 59.7, and well above the Bloomberg consensus estimate calling for an increase to 60.5. Both the current conditions portion of the index and the expectations component of the report rose solidly. The 1-year inflation forecast declined to 4.0% from 4.4% in December, and the 5-10-year inflation outlook increased to 3.0% from the prior month's 2.9% rate.

Inflation has driven aggressive monetary policy tightening by the Fed, along with a continued tight labor market. Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her article, Fixed Income Outlook: Bonds Are Back, how we see opportunities in 2023 for the bond market to provide attractive yields at lower risk than we've seen for several years. You can follow Kathy on Twitter: @KathyJones.

Treasury rates were higher following the inflation data, as the yield on the 2-year note rose 7 bps to 4.21%, the yield on the 10-year note increased 5 bps to 3.50%, and the 30-year bond rate gained 3 bps to 3.61%.

Please note: All U.S. markets will be closed on Monday in observance of the Martin Luther King Jr. holiday.

Europe mostly higher amid more inflation data

Stocks in Europe were higher for the most part as the markets continued to digest yesterday's December U.S. consumer price report and today's read on import prices, as well as some inflation data within the region. Consumer prices in Spain rose during December, but fell in France, with both measures cooling from the month prior. The data came amid recent optimism that Europe may be able to avoid a recession even as monetary policies tighten, aided by eased energy crisis concerns, as well as the implications of China's reopening. Equities have been positive to start 2023 despite uncertainty regarding the ultimate impact on the economy and financial conditions of recent global monetary policy decisions to aggressively tighten policies to combat inflation. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses his Top Global Risks of 2023, highlighting our top five risks that may define the global markets, considering that a new year almost always brings surprises of one form or another. You can follow Jeff on Twitter: @JeffreyKleintop.

In other economic news in the region, industrial production in the Eurozone improved markedly, and the trade deficit narrowed significantly, while GDP in the U.K. rose 0.1% in November, above expectations for a contraction of 0.2%, and following 0.5% growth in the prior month. The euro and British pound traded lower versus the U.S. dollar, while bond yields in the Eurozone were mostly higher, and rates in the U.K. gained ground. The U.K. FTSE 100 Index was up 0.8%, Spain's IBEX 35 Index advanced 0.6%, Germany's DAX Index and Italy's FTSE MIB Index increased 0.2%, and France's CAC-40 Index gained 0.7%, while Switzerland's Swiss Market Index was nearly unchanged.

Asia mostly higher following U.S. inflation reports

Stocks in Asia finished mostly higher in the wake of gains in the U.S. following a consumer price report that showed inflation has cooled, raising hopes of a less aggressive Fed. The moves also come amid some economic data out of China and central bank action in the region. China's exports fell less than forecasts, but at the fastest pace since February 2022, while imports also shrank at a pace that was below expectations, but the net result indicated softer global demand, and a lull in domestic activity amid the surge in COVID infections. However, recent reopening announcements out of China have continued to buoy sentiment, as Hong Kong and mainland China have begun to allow quarantine-free travel after keeping borders restricted for almost three years. In his article, Global Outlook: Recovery and Risk, Schwab's Jeffrey Kleintop notes how markets may continue to see volatility in 2023 as they navigate between global economic growth and inflation fears, with central banks' decreasing rate hikes and China's reopening.

Investors also digested the Bank of Korea's (BoK) decision to raise its benchmark interest rate by 25 bps to 3.50%, matching expectations, and what many analysts are forecasting could be its last increase, as the country's exports have tumbled, and it faces a deterioration in consumption and corporate investment. In its statement accompanying the decision, the BoK said it sees GDP growth in 2023 to slow more than expected, and that it will extend measures in place to provide support to short-term money markets. However, it made no mention of future rate increases.

Japan's Nikkei 225 Index was the lone bourse in the red in today's session, finishing 1.3% lower amid some strength in the yen versus the U.S. dollar. China's Shanghai Composite Index and the Hong Kong Hang Seng Index both were 1.0% higher, South Korea's Kospi Index advanced 0.9%, Australia's S&P/ASX 200 Index gained 0.7%, and India's S&P BSE Sensex 30 Index advanced 0.5%.

Markets extend bullish start to the year

The first full week of 2023 turned out to be a positive one for the U.S. equity markets, with the major indexes not only seeing solid increases for the week but adding to gains year-to-date. The inflation landscape was in focus, with the Consumer Price Index (CPI) continuing to cool, but the core rate, which takes food and energy out of the equation, rose, and import prices also surprisingly increased, taking some of the luster off the headline figure. Inflation has been a key driver in the Fed's rate hike campaign, so the consumer price report appeared to be welcome news for investors. However, uncertainty over how the data will impact the Fed's moves going forward remained an overhang to keep sentiment in check, as well as next week's data on wholesale prices looming. Q4 earnings season got rolling with a number of results from big names out of the Financials sector that offers mixed results. Meanwhile, Treasury yields dipped and the U.S. dollar saw choppy action throughout the week, while crude oil prices steadily climbed, and gold added to its recent run.

Next week's economic calendar will again be light and start off slow, with no reports slated for release on Monday due to observance of the holiday, and the lone report on Tuesday being the Empire Manufacturing Index. The final piece of the inflation picture will come in the form of the Producer Price Index (PPI) on Wednesday. Housing will dominate the docket, with reports slated for release to include housing starts and building permits, existing home sales, the NAHB Housing Market Index, and the weekly read on the MBA Mortgage Applications Index. December retail sales will offer a glimpse at the critical holiday shopping season. Other reports on tap include the Fed's Beige Book, and industrial production and capacity utilization reports, along with business inventories, the Philly Fed Manufacturing Activity Index, and initial jobless claims for the week ended January 14.

The international economic calendar for next week will hold a number of reports that could shape market action, including China—retail sales, industrial production, December GDP, and PPI. Japan—retail sales, the Tertiary Industry Index, CPI, and industrial production. Australia—consumer confidence, and employment figures. Eurozone—CPI, along with German CPI, and PPI, as well as investor confidence. U.K.—employment data, retail sales, CPI, PPI, and the Retail Price Index.


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